Invest or Pay Off Debts?
Making the decision between paying off debts quickly or investing isn’t something I had ever even considered until I started learning more about personal finance. I never realized how important it is to look at the interest rates in making that decision, so I’m hoping to share what I’ve learned so that you, too, will benefit from this knowledge.
Interest rates are like the sour patch kids of personal finance.They can be OH so helpful and then turn around and bite you in the a**. They determine how much it'll cost you to borrow money and how much money you can rake in from your investments. The golden rule is simple: if the interest on your debts is higher than what you could make by investing, you’ll want to increase those debt payments. But if you’re making money in your sleep due to the high interest on your investments, it might be worth saving and investing instead of putting that additional money into paying off your debts faster.
If interest rates are sour patch kids, credit cards are… warheads? When you treat them right, you’ll be rewarded with all the free things— flights, hotels, instacart memberships, etc. The interest rates, though, YIKES. If you don’t pay them off when you’re supposed to, you can rack up debt like none other. Seriously, those rates can be scarier than the twin sisters in [every] horror film. I can almost guarantee those will be your highest interest rates.. higher than the interest on your car, your house, and certainly higher than the interest your investments or high yield savings account is making. If you’re trying to decide whether to pay off your credit cards or put money into an investment account, worry about the investments later and pay off those credit cards ASAP.
Now, let's talk about moderate-interest debts. We're talking about mortgages and auto loans—those big-ticket items that make you feel like a real adult. Generally speaking, these interest rates are significantly lower than credit card rates. My mortgage has a 3.39% interest rate, while my car is at 2.5%. While I COULD put more money into paying off those loans quicker, that may not be the best use of my money if the interest on my investments is higher than the interest on my house or car. This is the way I think about it: I’m paying my mortgage at a 3.39% interest, while my high yield savings account is making 4.3% interest. Considering that I’m definitely not going to live in this house for the entirety of the 30 years it will take to pay off the loan, I’ve decided to put the money I could pay the house off faster with in my investment accounts instead.
No matter what financial path you choose, don't forget to assemble your emergency fund. You want to make sure to have 3-6 months of expenses stashed away somewhere safe that you have immediate access to (preferably in a high-yield savings account) for if and when emergencies strike. When those inevitable crises come up, you don’t want to have to fall back on your credit card with that nasty high-interest debt. Saving money for a rainy day will ensure you can continue saving money instead of pausing the investments to pay off the debt.
So, there you have it! By now, I’m hoping it’s been made a little more clear to you whether you should save and invest or tackle your debts. Remember— always pay off those high-interest debts as soon as possible, but keep an eye on the moderate and low interest debts, too. It may work out in your favor to pay those off slower while investing extra money into high-interest accounts.
